SMM Daily Review - 2012/2/13 Base Metals Market

SHANGHAI, Feb 14 (SMM) –

Copper
As LME copper prices fell overnight, SHFE 1205 copper contract prices, the most active one, opened RMB 750/mt down at RMB 61,010/mt Monday. SHFE three-month copper contract prices slipped rapidly after the opening, fluctuating lower to RMB 60,700/mt and reaching a low of RMB 60,450/mt. In the afternoon session, as Chinese stock markets fell from initial increasing, and as LME copper prices met resistance at USD 8,600/mt, SHFE three-month copper contract prices lacked momentum to rise further after rising to RMB 61,150/mt. Finally, SHFE 1205 copper contract prices closed at RMB 60,770/mt, down RMB 990/mt or 1.6%. Positions for SHFE 1205 copper contracts were up 1,986 lots, while trading volumes were down 43,818 lots. SHFE copper prices faced great pressures at the 5-day moving average of RMB 61,160/mt, and will test support at the 10-day moving average of RMB 60,700/mt.  

In the spot market, as SHFE copper prices fell by 1.5%, and as the delivery date for SHFE 1202 copper contract nears, high-quality copper was traded at slight premiums, and mainstream offers were quoted between discounts of negative RMB 70/mt and premiums of positive RMB 50/mt in the morning business. Traded prices for standard-quality copper were between RMB 59,650-59,800/mt, and RMB 59,700-59,850/mt for high-quality copper. As spot copper prices declined blow RMB 60,000/mt, and as the price gap between SHFE 1202 and 1203 copper contracts remained around RMB 500/mt, downstream producers made purchases at the lows, helping significantly improve market transactions from last Friday’s stalemate. Cargo-holders of domestic standard-quality copper still held back goods owing to discounts, but buying increased obviously at the low price levels. In the afternoon session, since SHFE copper prices rallied, and as spot copper supply steadied, spot copper premiums fell, and offers for high-quality copper held around premiums of positive RMB 0/mt. Mainstream copper offers (including standard-quality copper) were reported between discounts of negative RMB 120/mt and premiums of positive RMB 0/mt in the afternoon business, while traded prices edged higher to between RMB 59,700-59,950/mt, with lower trading sentiment from the morning business levels.   

SMM conducted a survey regarding copper price trends this week.

Based on the survey, 60% market insiders believe copper prices will extend gains, with LME copper prices expected to reach a high at USD 8,800/mt and SHFE copper prices to jump above RMB 62,000/mt. Given the backdrop of the passage of Greece’s austerity measures, markets are optimistic towards the result of this week’s EU finance minister meeting, especially the second bailout package, so the euro will likely rally stably. The Fed will announce the latest minutes this week, and as the low benchmark interest rate will continue, markets expect the Fed will finally introduce QE3 measures one day. Chinese leader Xi Jinping will visit the US this week, and as the yuan central parity rate for the first time exceeded 6.3 mark last week, RMB still has room to appreciate, which can stimulate copper prices given loose monetary policy in the US. Chinese stock markets will likely continue to rebound and hold steadily at 2,300 points. Investors still prefer riskier assets, forming some buying support for copper. In spot markets, cargo-holders insisted on premiums, while downstream producers increase buying at the lows amid rising copper prices, both of which bolster copper prices on the fundamental side.   

The remaining 40% market insiders anticipate LME copper prices to fall to USD 8,500/mt and SHFE copper prices to RMB 60,000/mt. Despite many positive factors, copper prices will likely post fewer gains. Although market expectations on loosening monetary policy have been heightening, tightness in cash flows is unlikely to improve over the near term from the central bank’s recent moves. This means stock and futures markets cannot get capital support, which will dampen copper’s upside momentum. SHFE copper inventories have increased by nearly 20,000 mt following the prior week’s rise of nearly 50,000 mt, suggesting weak domestic demand and ample market supply. Orders at downstream producers didn’t experience significant increases, depressing buying interest. Copper prices will easily suffer sell-off pressures owing to technical resistance.

Aluminum
The most active SHFE aluminum contract for delivery in May struggled at the 5-day moving average and finally closed down RMB 40/mt or 0.24% on Monday, with less than 10,000 contracts being transacted. Lower expectations of loosening property curb has damped optimism towards the metal, which is expected to meet stronger resistance at RMB 16,300/mt in the near term.

Spot aluminum traded mainly between RMB 15,900-15,940/mt in Shanghai, at narrower discounts of RMB 30-70/mt over the SHFE current-month aluminum contract which is being pressured and to shift to the following one. Middlemen hardly received goods lacking arbitrage opportunities while downstream demand stayed weak.

In a recent SMM survey on this week’s aluminum prices, 74% market respondents expect stability as pressure lasting curb on the property market and contracted export orders due to the European debt crisis will be offset by high production cost. 18% of respondents said aluminum prices will climb this week, mainly supported by high copper prices and withholding of goods by large aluminum producers in a bid to pull aluminum price above RMB 16,000/mt. Remaining 8% respondents expect lower aluminum prices this week as continually climbing domestic and overseas aluminum stocks weigh on the metal and spot discounts are expected to return above RMB 100/mt over the SHFE current-month aluminum contract which will shift to the following one.

Lead
On Monday, SHFE three-month lead contract price dipped low after opening down at RMB 16,040/mt due to the slump in LME lead prices, but then rose to move around RMB 16,000/mt. In midday, SHFE lead prices edged up to RMB 16,100/mt along with the rising Chinese domestic stocks and LME lead prices but with strong resistance. Prices finally closed at RMB 16,015/mt, down RMB 55/mt. Trading volumes increased by 68 lots to 176 lots, and positions decreased by 106 lots to 1,560 lots.

Quotations for domestic well-known brands such as Chihong Zn & Ge, Chengyuan, and Nanfang were at RMB 15,840-15,900/mt, with discounts against the most active SHFE lead contract price at RMB 100-150/mt. Lead from Gejiu were quoted between RMB 15,750-15,800/mt, with spot discounts at RMB 200/mt. Smelters continued to sell goods with inventories built before the holiday, while downstream buyers stayed out of markets due to bearish view on market outlook, leaving transactions quiet.

This week, concerns still dominated base metals markets. According to SMM survey to related enterprises, few market players were optimistic to lead price trends, with 73% of them holding a cautious attitude and 27% pessimistic to the market. The Greek debt issue remained to be a vital factor influencing investors’ opinions.

The 73% market players remaining cautious believe lead prices will move between RMB 15,850-16,050/mt with little change from previous week. Although Greek parliament approved the second round bailout deal, helping the country avoid default risk, the EUR 130 billion loans still need approval from EU leaders on the EU summit to come into effect. Moreover, the implementation of the bailout will be confronted with great challenges. Thus, market players are relatively cautious. In China’s domestic spot market, despite the favorable prices for smelters, which leads to higher selling interest, downstream demand remains weak, leaving modest transactions in spot markets.

The remaining 27% market players are pessimistic to lead price trends in the coming week. As Consumer Confidence Index was reported lower than expected and S&P downgraded ratings for 34 Italian banks, market concerns over the European debt crisis are likely to spread further. On the other hand, LME lead inventories continued to increase to as high as 382,600 mt, while discounts of LME spot prices against LME three-month lead contract price also grew to USD 33/mt. In this context, pessimistic investors believe lead prices are expected to move between RMB 15,600-15,800/mt in the coming week.

Zinc
SHFE three-month zinc contract prices opened lower at RMB 15,950/mt negatively affected by weak LME zinc prices last Friday, with prices falling to RMB 15,900/mt before returning to the daily moving average. SHFE three-month zinc contract prices rebounded to RMB 16,100/mt in the midday driven up by strengthening Shanghai Composite Index and the entrance of long investors, with prices later gradually losing previous gains and finally closing at RMB 15,995/mt, down RMB 175/mt or 1.08%. Positions for SHFE 1205 zinc contract were up by 15,364 lots, to 108,510 lots.

In the spot market, as SHFE three-month zinc contract prices fell below RMB 16,000/mt, spot discounts for domestic registered brands narrowed. #0 zinc was traded at discounts of RMB 220-240/mt over SHFE three-month zinc contract prices, while imported zinc and #1 zinc were traded at discounts of RMB 350-400/mt, with traded prices moving between RMB 15,600-15,650/mt. Only domestic registered brands were attractive to market players as the delivery date neared, and downstream consumers were cautious toward buying.  

With regard to zinc price trends this week, 50% of market players believe SHFE three-month zinc contract prices will struggle around RMB 16,000/mt, moving between RMB 15,800-16,200/mt, with discounts between RMB 300-400/mt. Greek problem has eased, while US economic data was also positive. In this context, LME zinc prices are expected to move between USD 2,100-2,200/mt. Although downstream enterprises restarted production following the Lantern Festival, demand improved slowly, combined with large amounts of imported zinc with lower prices than domestic zinc prices, imported zinc squeezed downstream demand. The imported zinc prices have been at low levels due to high profit margins, so SHFE zinc prices resist increases.

30% of market players believe zinc prices should fall below RMB 15,800/mt. Discounts of only registered brands remained low, while discounts of non-registered and imported zinc were adjusted to attract buyers. Discounts will expand after SHFE zinc contracts are delivered this week, and SHFE three-month zinc contract prices will fall as shorts sell off goods. LME zinc prices are expected to fall below USD 2,050-2,100/mt, and SHFE three-month zinc contract prices will move between RMB 15,500-15,800/mt, with discounts narrowing to RMB 200-300/mt.

The remaining 20% believe zinc prices should stand above RMB 16,000/mt. Greek problem has eased, and euro zone issue no longer dominates the market. Premier Wen’s statement boosted market confidence, causing speculations of interest rates cut to improve. In domestic spot markets, spot demand improved as downstream enterprises returned to the market. LME zinc prices should move between USD 2,200-2,250/mt, SHFE three-month zinc contract prices will rise to RMB 16,300-16,600/mt, with discounts expanding to RMB 400-500/mt.

Tin
Spot tin prices slipped slightly to RMB 177,000-181,000/mt in Shanghai on Monday, as losses in LME tin prices last Friday and renewed worries towards the Greek debt crisis damped market optimism, leading to light trading. Fragility is seen in spot tin prices as smelters gradually resume production while downstream demand stays weak.

In a recent SMM survey on this week’s tin prices, 60% market respondents are neutral, saying approval of the Greek austerity plan and stability in the macroeconomic scenario will support base metals. LME tin prices, for instance, have stayed high. Domestically, strength in LME tin and low interest in lowering prices by smelters will also provide support, which will be even stronger as downstream demand recovers further.

Remaining 40% respondents said slight losses might be seen in this week’s tin prices, mainly due to weak demand and possible losses in LME tin prices. Greece’s approval of its new austerity plan does not suffice material improvement in European uncertainty and metals are still subject to development of the region’s debt crisis. Domestically, though supply is not in full swing, demand is also weak. Pessimism for the first half year means weaker demand this year, which will induce more losses in domestic tin prices.

Nickel
The Greek Parliament passed the controversial austerity bill in order to win the second round bailout from the European Union (EU) and the International Monetary Fund (IMF). Inspired by this news, LME nickel prices advanced during Monday's Asian trading hours after opening at USD 20,800/mt. During the European trading hours, the EU and IMF will conduct a two-week long appraisal on Portugal to monitor the implementation of its debt plan. Market expectation towards the appraisal result, however, was not optimistic, as they concerned that Portugal may become the second Greece since yields rate of Greek government bond surged. Although Greece passed the austerity plan, market concern over Greece and Portugal may restrict LME nickel prices from rising further.

In the Shanghai nickel spot market, mainstream traded prices of nickel from Jinchuan Group were between RMB 144,000-144,500/mt, and mainstream traded prices of nickel from Russia were between RMB 142,700-143,000/mt during the morning trading hours. During the afternoon trading hours, mainstream traded prices of nickel from Russia advanced to RMB 143,000-143,500/mt, and mainstream traded prices of nickel from Jinchuan Group did not change much. As LME nickel prices slipped sharply last Friday, offers of spot nickel declined on Monday, attracting some downstream bargain hunters. In this context, transactions improved from several days.

Based on result of an SMM survey on market sentiment, 40% market players believe that LME nickel prices will continue to fluctuate since the outlook of European debt crisis is obscure and market trend is not clear. 

30% market players hold that LME nickel prices will pare last week’s losses and will advance further as progress is reported for the Greek debt crisis and since the US economy continue to recover. In addition, the low interest rate from the US will lend further support for base metals and other risk assets.

According to the remaining 30% market players expect, the euro zone faces many challenges at present, and outlook of the European debt crisis is obscure. LME nickel prices fell below 5-day and 10-day moving average consecutively after closing with sharply losses last Friday. Technically speaking, LME nickel prices are tend to decline further, if prices fall below 20-day moving average.